New model of institutional innovation on the horizon

The Hainan Free Trade Port has been attracting international limelight. Much of the discussion in the run-up to inauguration of the FTP's island-wide special customs operations on Thursday has revolved around tariff-free policies and low taxation, but the core of Hainan's institutional innovation lies in its pioneering special customs model.

This model is built around two key conceptual boundaries that together reshape how goods, capital and industries interact with both China and the world.

First, "freer access at the first line" creates a highly open boundary between Hainan and overseas markets. Goods entering or leaving the island enjoy significantly streamlined procedures with minimal or zero tariffs — unless they are destined for the Chinese mainland. The proportion of zero-tariff items exempted from import duties, value-added tax and consumption tax has surged from 21 percent to an impressive 74 percent.

Second, "regulated access at the second line" regulates goods entering the mainland from Hainan under a refined supervisory regime. Products processed in Hainan that meet a minimum 30 percent value-added requirement enjoy special tax exemptions. This transforms Hainan into a compelling processing and manufacturing base for enterprises aiming to serve the vast Chinese market.

While Hainan has drawn inspiration from Hong Kong — particularly in attracting global talent and professional services — it is neither a replica nor a rival.

The two economies differ markedly in scale, structure and positioning. Rather than competition, the Guangdong-Hong Kong-Macao Greater Bay Area provides a framework for synergy, by which the Hong Kong Special Administrative Region can complement Hainan's emerging strengths, and both can jointly contribute to the whole country's broader strategy of high-standard opening-up.

Hainan's unique advantage lies in its combined offering of extensive zero-tariff treatment for production inputs and competitively low income tax rates. High-end and urgently needed foreign and domestic talent enjoy a preferential 15 percent income tax rate, mirrored by the same rate for enterprises in encouraged sectors. Together, these policies create a powerful magnet for investment, manufacturing and innovation.

The inauguration of special customs operations will further streamline cross-border flows and cement Hainan's role in the country's road map to deeper global economic integration.

As China's flagship free trade port and a key symbol of Chinese modernization, the Hainan FTP is designed to align with the highest global standards of trade rules and policies for the free and orderly flow of goods, capital, personnel and data, positioning it as a "prototype" for future institutional reforms in trade, finance, investment and data governance.

What ultimately matters is the successful delivery of these policies, enabling businesses in Hainan to operate seamlessly with global partners under interoperable trade standards for digital documentation and data flows.

Hainan's geographic position makes it a strategic gateway for trade and multidimensional connectivity with Association of Southeast Asian Nations economies and beyond. Yet Hainan's influence need not be confined to ASEAN per se.

As more Chinese provinces intensify their respective outreach to the grouping, which is now China's largest trading partner, competition for engagement opportunities is on the rise. In this landscape, Hainan's free trade port model provides the island with a unique edge to serve as a pivotal logistics hub for the broader Regional Comprehensive Economic Partnership, currently the world's largest free trade area.

Powered by robust China-ASEAN trade and buoyed by the newly upgraded China-ASEAN Free Trade Area 3.0 (CAFTA 3.0), Hainan's integration with the RCEP will bring fresh momentum to the region. Beyond the key cooperation areas of the digital economy, green transition and cross-border e-commerce already embedded in CAFTA 3.0, Hainan is well placed to pioneer additional new growth drivers, particularly the blue economy, which — spanning sustainable fisheries, aquaculture, cruise tourism and ecological marine parks -offers vast potential that aligns naturally with Hainan's maritime character.

Besides being globally known as a leading tourist destination, Hainan also stands out as China's most open province for entry, where visafree access is granted to nationals from 86 countries and regions. Air connectivity is another asset yet to be fully harnessed. A four-hour flight radius that covers 21 countries and regions across Asia — representing 47 percent of the world's population — offers Hainan the potential to evolve into an aviation hub for the Asia-Pacific region. This could further be expanded to an eight-hour radius reaching 59 countries across Asia, Oceania, Europe and Africa, constituting 67 percent of the global population.

Complementing its air advantages, Hainan's maritime capacity is set to rise as the Yangpu International Container Port expands to meet growing berthing and transshipment demands. The future promises a highly efficient network of bonded logistics corridors, streamlined electronic customs clearance, and rapid processing at ports and airports, all of which constitute the essential pillars for a world-class free trade port.

As a second-generation descendant of overseas-born Hainanese, little did I anticipate that acquiring free trade port status would turn out to be a game-changer for the island, transforming what was once an economic backwater in China into a potential world-class, islandwide hub for logistical and free trade connectivity. Its vast, multidimensional potential is yet to be fully harnessed. It is amazing to witness the transformative changes that are set to project Hainan as a bright spot on the world map of sustainable development, in less than 40 years after its inception as a province.

By ushering in the inauguration of the special customs operations for the Hainan Free Trade Port, China marks a new milestone in Hainan's development trajectory, and the island appears set to be ready to herald a new phase of institutional opening-up amid escalating global protectionism.

At this juncture, what remains essential is the readiness and active participation of local communities on the threshold of a changing paradigm. While preserving the tapestry of their cultural heritage, endeavors to foster an increasingly cosmopolitan environment will be key to ensuring that the Hainan FTP does not merely serve as an economic project, but more as a new model of Chinese institutional innovation integrating China with global free trade.

The author is president of the Belt and Road Initiative Caucus for Asia Pacific, an independent, nongovernmental think tank platform in Malaysia.

The views do not necessarily reflect those of China Daily.